Cochlear chairman could cop unpleasant earful

Holliday-Smith, by Insider's reckoning, faces a comprehensive ear-bashing over the 35 per cent dive in Cochlear shares from more than $72 to yesterday's close of $46.28. If that was not bad enough, he has possibly the perfect storm of items on the notice of meeting: he is up for re-election, chief executive Dr Chris Roberts needs a large parcel of performance options ticked and directors are asking for an increase in their fees ceiling to $2 million. The remuneration report vote will no doubt be a cakewalk.

Investors attending the gathering in the ballroom at Sydney's Menzies Hotel can look forward to plenty of soothing, blue-coloured decorations, an uplifting video presentation of the recipients of its implants and the doors being thrown open around 11.30am to waft in the smell of coffee and Danish pastries. As for Holliday-Smith, Insider expects that he will have a running script thicker than the annual report and some extended rehearsals from PR advisers on how to handle difficult conversations.

Analysts are still revising downwards their profit forecasts on the effect of Cochlear's product recall, caused by a number of devices that stopped working for reasons that are still not entirely clear. The company did the correct and sensible thing of pulling back all the models of the suspect device from the shelves particularly given that the notoriously litigious US is one of its key markets.

Sadly, though, that action is (forgive Insider) likely to fall on deaf ears from an investor perspective. Cochlear, which makes more than 80 per cent of its sales from America and Europe, has for years traded at a significant premium for not having had device problems.

That premium has evaporated, and while it might well be recovered once the extent of the problems are known, in markets as flighty as these, the process of restoring lost faith is usually long and painful.

UBS this week produced a report that said moisture seemed to be stopping the hearing devices working, although what moisture and how it got there is still being examined.

The options being allotted to Roberts are part of the company's long-term incentive scheme that has been running for some years, although he is slated to receive about 50 per cent more of them this year than last. And, even though they are yet to vest (and may never), with an exercise price of $68.56 they are wildly out of the money.

What might also cause Holliday-Smith some heartburn is that the calculation of the number of options due to Roberts suggests that he is getting a 6 per cent pay rise this year.

The latest Cochlear annual report put Roberts's base pay at a bit over $1.2 million, with another $40,000 or so in superannuation and long-service leave entitlements which is about 5 per cent more than in 2010. Generally all those amounts are used in calculating increases, bonus percentages and share rewards.

The notice of meeting from Cochlear said the options due to him are being calculated on 75 per cent of his "fixed remuneration", and reckon the number is $986,381. Insider's calculator reckons that is 75 per cent of $1.32 million, so the board of Cochlear appear to be not the only ones getting a kick-along in wages this financial year.

As for directors' fees, the non-executive board members at Cochlear took home close to $1.4 million in 2011, which is bumping up against the $1.5 million ceiling voted in by shareholders back in 2007.

Technically Holliday-Smith is being underpaid, based on the rule of thumb that chairmen get three times the fee of fellow "ordinary" directors. Most of them received around $170,000 this year, which means the chairman could have claimed $510,000 rather than the $440,000 he did receive.

Buybacks in fashion

BUYBACKS are the new black as companies try to massage share prices and asset-backing figures to make it look like their companies are moving forward.

An in-depth survey by Insider of two days' worth of ASX announcements came up with about 40 companies that are either in the throes of returning capital to investors or have just completed one.

Transfield Services joined the queue yesterday with a pledge to buy back up to 44.14 million shares. The announcement lifted Transfield shares back up to $1.97, which means the buyback would cost about $90 million. The stock has been crunched from more than $3 only a couple of months ago and there have been whispers about it becoming a takeover target while the price lolls at these levels. No surprise then that Transfield did an analysts' briefing and prepared a nine-page presentation extolling the proposition's virtues.

Insider's random sample of a handful of buyback stocks suggests that neither higher trading prices nor juicier net asset backing figures are guaranteed by these forms of aggressive capital management although at least investors get some effectively tax-free cash back in their pockets at a time when capital gains are hard to come by and dividends often slim. Still, while it might be a nice way of playing the ATO on a break and improving ratios, giving money back to investors always seems to smack of a management team running out of ideas or courage.

The grand-daddy of buybacks, by the way, seems to be Rupert Murdoch's News Corporation, which lodged its first campaign in 2005 and has been mopping up the non-voting stock ever since. To date it has spent $US$1.4 billion repurchasing 86 million of the "A" shares, although its filings seem to indicate that not a single investor in Australia has opted to participate.

The other effect of buybacks is that large shareholders who do not accept end up with a much larger piece of the company's pie. The Kirby family at Village Roadshow used to be a good example, but Insider notes that funds manager Orbis has crept up from 15 per cent to almost 20 per cent of Sunland Group through a few additional purchases, but mostly via a just-completed buyback.

insider@fairfaxmedia.com.au

Insider expects Holliday-Smith will have a running script thicker than the annual report and some extended rehearsals from PR advisers.